Water heating and treatment solutions company A.O. Smith (NYSE:AOS) announced better-than-expected revenue in Q1 CY2025, but sales fell by 1.5% year on year to $963.9 million. The company’s full-year revenue guidance of $3.85 billion at the midpoint came in 0.5% above analysts’ estimates. Its non-GAAP profit of $0.95 per share was 3.8% above analysts’ consensus estimates.
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A. O. Smith (AOS) Q1 CY2025 Highlights:
- Revenue: $963.9 million vs analyst estimates of $953.7 million (1.5% year-on-year decline, 1.1% beat)
- Adjusted EPS: $0.95 vs analyst estimates of $0.91 (3.8% beat)
- Adjusted EBITDA: $203.5 million vs analyst estimates of $197.3 million (21.1% margin, 3.2% beat)
- The company reconfirmed its revenue guidance for the full year of $3.85 billion at the midpoint
- Management reiterated its full-year Adjusted EPS guidance of $3.75 at the midpoint
- Operating Margin: 19%, in line with the same quarter last year
- Free Cash Flow Margin: 1.8%, down from 8.6% in the same quarter last year
- Organic Revenue fell 2.5% year on year (1.8% in the same quarter last year)
- Market Capitalization: $10.01 billion
StockStory’s Take
A. O. Smith’s first quarter results reflected a combination of challenging end markets and internal actions to adapt to external cost pressures. Management pointed to lower North American water heater volumes—driven by a tough comparison to last year’s pre-buy activity—as a primary driver of the sales decline, while highlighting growth in commercial boiler sales and disciplined cost containment. CEO Kevin Wheeler noted that the team “delivered a solid performance in the first quarter with volumes tracking our expectations,” despite ongoing headwinds in China and lingering uncertainty from tariffs.
Looking ahead, the company’s full-year guidance is shaped by the volatile tariff environment and the transition of leadership to new CEO Steve Shafer. Management emphasized that announced price increases are expected to offset tariff-related cost inflation, but these have not yet been factored into top-line projections due to ongoing policy uncertainty. Wheeler explained, “We have taken action and are confident in how we’re going to maintain EPS in our guidance on sales,” while Shafer added that cross-functional tariff response teams are working to mitigate cost impacts and accelerate supply chain adjustments.
Key Insights from Management’s Remarks
Management’s remarks centered on adapting to external challenges through targeted operational changes and strategic focus. The transition in executive leadership and ongoing response to tariffs were major themes.
- CEO Transition Announced: Steve Shafer will assume the CEO role on July 1, with Kevin Wheeler remaining as Executive Chairman. Management stressed continuity in strategy and a smooth leadership change.
- Tariff Response Actions: The company has mobilized cross-functional teams to address supply chain risks and manage tariff-induced cost increases. Pricing actions averaging 6%-9% for water heaters have been announced, though not fully reflected in revenue guidance.
- North America Sales Dynamics: Water heater volumes declined due to last year’s pre-buy activity, but commercial boiler sales rose 10%. The company maintained stable production to promote plant efficiency and avoid excess inventory.
- China Market and Restructuring: Sales in China fell 4% in local currency, with consumer confidence and real estate weakness cited as key factors. Management is completing a restructuring program to realize $15 million in annual savings and expects margin improvement even with lower volumes.
- Water Treatment Channel Shift: In North America, water treatment sales growth in e-commerce, dealer, and direct-to-consumer channels offset declines in retail, reflecting a strategic shift away from less profitable channels. The company projects margin expansion for this segment through cost management and prioritizing higher-return sales channels.
Drivers of Future Performance
Management’s outlook for the rest of the year hinges on navigating tariff-related cost volatility, executing announced price increases, and sustaining operational discipline in both North America and China.
- Tariff Mitigation Measures: Cross-functional teams are tasked with responding to evolving tariffs, including supply chain adjustments, pricing, and cost containment. The company expects pricing actions to help offset increased costs, but says the impact will be clearer by the end of the second quarter.
- China Recovery Uncertainty: The business continues to face weak consumer confidence and a slow real estate market in China. Management believes that recent stimulus serves as a market stabilizer but does not expect a near-term catalyst for significant growth.
- Product and Channel Optimization: Continued focus on margin improvement through channel prioritization in water treatment, further ramp-up of tankless production in Mexico to reduce tariff exposure, and investments in R&D and regulatory readiness are expected to support performance over time.
Top Analyst Questions
- Jeff Hammond (Keybanc Capital Markets): Asked about possible demand destruction from price hikes and if margin gains are expected. Management said pricing is intended to offset costs, not boost margins, and recurring water heater replacement demand stabilizes the business.
- Mike Halloran (Baird): Inquired about supply chain rebalancing needs due to tariffs. Management outlined accelerated tankless production in Mexico, flexibility in sourcing, and ongoing evaluation of further network changes as policy evolves.
- Saree Boroditsky (Jefferies): Sought clarity on the timing and impact of announced price increases. Management confirmed pricing actions have been communicated but are not factored into revenue guidance due to tariff uncertainty.
- Scott Graham (Seaport Research Partners): Questioned assumptions for residential water heater replacements and China’s outlook. Management cited stable replacement rates in North America and emphasized consumer confidence—not just housing recovery—as crucial for China.
- David MacGregor (Longbow Research): Asked about U.S. production capacity and regulatory changes for commercial gas products. Management stated it has adequate domestic capacity, is already highly vertically integrated, and is preparing for new efficiency standards as scheduled.
Catalysts in Upcoming Quarters
In the coming quarters, the StockStory team will monitor (1) the pace and effectiveness of tariff-related pricing actions and supply chain shifts, (2) signs of stabilization or improvement in China’s consumer environment and the impact of restructuring, and (3) progress in transitioning tankless water heater production to Mexico to further insulate against tariff risks. Execution on cost management and regulatory preparation will also be critical.
A. O. Smith currently trades at a forward P/E ratio of 18.3×. Is the company at an inflection point that warrants a buy or sell? The answer lies in our free research report.
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